A new kind of luxury product is taking a bite out of wealthy consumers’ money

Despite slowing growth, the luxury goods sector shows relative strength and remains attractive to investors (Illustrative Image Infobae)

Luxury goods seem immune to economic woes, but their shine may be fading.The luxury goods market has boomed during the epidemic as the wealthy are not deterred by rising prices and are intoxicated with luxury goods Birkin bag and expensive watches.However, there are now signs of a slowdown Prosperity The luxury of the “Roaring 20’s”.

exist ChinaFor example, the sales boom that occurred in early 2023 did not last long. The country’s slow economic recovery and global uncertainty have led to a decline in luxury spending.according to Claudia Dapizioof Bain & CompanyExperts on the subject say that despite initial headwinds, the luxury market still faces challenges due to geopolitical changes and low consumer confidence.

The turmoil has affected major companies such as LVMH, the group behind Dior and Louis Vuitton.Its revenue growth slowed in the third quarter compared with the same period last year, as rivals such as Kering Groupthe owner of Gucciand Burberry.

Although Richemont Group’s half-year sales increased by 6%, it fell short of expectations, and the prices of Rolex and Patek Philippe in the secondary market were also affected.

Although there are some outliers, e.g. HermesDespite strong sales in the third quarter, the luxury goods industry overall still faces uncertainty.

However, specialized segments such as luxury cruises are booming, growing 116% year-on-year at constant exchange rates.

The complexity of the current luxury market landscape calls into question the true trajectory amid conflicting reports of easing income and spending. What’s going on in the wealthy world?

While some brands like Hermès remain strong, the luxury industry as a whole faces a period of uncertainty and adjustment (Reuters/Mike Black)

The pandemic marks the peak of luxury: Savings from stimulus checks and furlough schemes have bolstered shoppers’ purchasing power, but they have fewer ways to treat themselves during travel bans and shutdowns. At that time many people turned to luxury goods, buying more champagne and designer handbags than before.

“People, especially white-collar workers, have released huge excess savings or purchasing power by staying at home,” he said. Javier González La Stellaa portfolio manager focused on luxury goods ETF theme.

The growth of the luxury category during the pandemic is reflected in the following data: Deloitteshowing that the top 100 luxury goods companies are larger and more profitable than ever in fiscal 2022.

But then, as interest rates and inflation rose, La Stella said, consumers began to tighten their belts and become more vigilant about where their money was being spent.

The huge expenses of that era Pandemic It’s done wonders for luxury companies’ profit margins, but it was never intended to become the new normal. Regardless, this is an anomaly and the slowdown in growth we are seeing today reflects a gradual adjustment to the pre-recession norm. Coronavirus disease.

Luxury brands such as LVMH reported lower revenue growth, suggesting the market is cooling after a period of accelerated growth (REUTERS/Tyrone Siu)

“Fundamentally, this is not sustainable and it shouldn’t be,” Flavio Seredainvestment manager of an asset management company GAMHeadquartered in Zurich, it references the high growth rates of the luxury goods industry. “I think what you’re seeing this year is this slowdown, it’s a process towards normalization. It looks worse than it actually is because it’s coming from a very high level.”

Luxury company executives also noted that the apparent economic slowdown is simply a return to the status quo, rather than an outright catastrophic scenario for the entire luxury industry. In its half-year results released last month, Richemont chief executive Johann Rupert noted “a general normalization of market growth expectations across the industry”.

Data also confirms this: according to the industry report, across all luxury categories globally, consumption in the luxury industry is expected to be approximately 1.5 trillion euros ($1.62 trillion) in 2023 Long live luxury of Bain & Company November.

That’s about 70% higher than 2019 levels at constant exchange rates, although industry-wide prices rose an estimated 29% in the period to keep up with rising production costs, according to Retail Data Corp. edit.

He said the performance of different luxury brands may also depend on the type of consumers they target. Natalia Lehmanova,Chief Economist MasterCard for Europe.

Entry-level “aspirational” consumers may be more susceptible to macroeconomic factors and their impact on investment portfolios than affluent segments of the population.

“It must be taken into account that luxury consumers range from the affluent upper-middle class to the billionaires. The former have become more price-sensitive: investment bank bonuses have declined, job losses in the technology industry have occurred, the cryptocurrency bubble has burst, and many wealthy professionals have become more price-conscious. People increasingly have to prioritize investments. Paying higher interest on mortgages instead of vacations or expensive interest bags,” Lechmanova said in an email wealth.

The slowdown in luxury goods growth reflects post-epidemic normalization and adjustments in consumer expectations and spending habits (Reuters/Mike Segar)

The decline in spending in some luxury segments reflects changes in shopper preferences and their demand for discretionary items in the current economic climate.

However, according to La Stella, ETF themeConsumers are splurging on different types of luxury goods than in recent years.

“The slowdown we’re seeing is largely due to people now spending their money on other things,” La Stella said. “So it’s a question of portfolio allocation that’s having an impact, not a question of unemployment or interest rate pressure. .”

Specifically, consumption is mainly aimed at luxury experiences. Bain & Company. dapizioThe co-authors of the November Luxury Market Report noted, Coronavirus disease The rise of travel has led more people to devote themselves to traveling Experiential luxury In 2023, this trend is expected to continue next year.

“What we see in 2023 is a rebalancing of customer interest in experiences and experience-based goods rather than products, with an unprecedented sense of urgency around social life and travel across geographies,” D’Arpizio said. He added: “Experience spending is returning to all-time highs, with consumers once again seeking luxuries beyond products.”

This could mean growth in categories such as travel, hotels and cruises as tourist traffic increases. Luxury goods purchases may also benefit, albeit to a lesser extent, due to growth in tourism, the report predicts. Bain & Company.

Some of these trends are starting to be reflected in corporate profits: Europe’s largest hotel group, AccorWith strong demand, it has raised its annual profit target twice this year.British group Rocco Forte HotelIt has branches across Europe and its revenue has grown.

“The value of experiences has more than doubled since 2010,” he said. dapizio. “This ‘new normal’ means the boundaries of the luxury market are blurring, giving brands the opportunity to expand their reach beyond their core.”

All signs point in different directions, and it is clear that next year the luxury industry will usher in a transformation that will begin in 2023.

HSBC A report in late November warned that what happened could have wider knock-on effects as luxury goods are linked to consumer confidence, tourism and the stock market.

The bank forecast more modest growth, saying “there’s nothing to be ashamed of, but slower growth momentum is rarely good for stocks in the sector.”

With the economic development of key areas, United States, Europe and China The luxury industry is still finding its footing and may still face “challenges” in 2024, he wrote Deutsche Bank last week.

But the bright side is that the luxury goods industry is more resilient than other consumer sectors in the economy.

“One of the reasons why people want to invest in this space is the rise of the middle and upper classes globally, which is a huge driver for all these (luxury) companies,” La Stella said.

(C) 2023, Fortune

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